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September 23, 2017 at 3:06 pm #408439aicca
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Statement given in the book.
A financial instrument is an equity instrument only if there is no obligation to deliver cash or other financial assets to another entity and if the instrument will or may be settled in the issuer’s own equity instrument. An example of an equity instrument is ordinary shares,on which dividends are payable at the discretion of the issuer. A less obvious example is prefernce shares required to be converted into a fixed number of ordinary shares on a fixed date or on the occurrence of an event which is certain to occur.
An instrument may be classified as an equity instrument if it contains a contingent settlement provision requiring settlement in cash or a variable number of the entity’s own shares only on the occurrence of an event which is very unlikely to occur-such a provision is not considered to be genuine. If the contingent payment condition is beyond the control of both the entity and the holder of the instrument,then the instrument is classified as a financial liability.
An instrument is a debt instrument if its redemption is triggered by a future uncertain event which is beyond the control of both the issuer and the holder of the instrument
1)Can you please explain these statements . I dont understand why they state preference share converted into equity shares on the occurence of an even which is certain -is an example of equity instrument
Again they state an instrument is an equity instrument if its contains contingent provision that would be met on conditions unlikely to occur
I am confused on whether the conditions have to be unlikely to occur or certain to occur
2) they state that if condition payment conditions is beyond the control of both the issuer and instrument holder then the instrument is a financial liability .. but it is also a condition for debt instrument . So why cant it be debt instrument ?September 24, 2017 at 9:23 pm #408536P2-D2Keymaster
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1) If it is certain to be converted into equity on the occurrence of an event that is certain to occur, then why wouldn’t it be equity? If it is certain to be equity in the future then let’s treat it as equity initially. The key is that the event is certain to occur.
2) I don’t fully understand this point as a debt instrument is a financial liability.
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